Porter 5 Forces

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The Five Competitive
Forces That Shape
Strategy
by Michael E. Porter
Included with this full-text
Harvard Business Review
article:
The Idea in Brief—the core idea
The Idea in Practice—putting the idea to work
1
Article Summary
2
The Five Competitive Forces That Shape Strategy
A list of related materials, with annotations to guide further exploration of the article’s ideas and applications
18
Further Reading
Awareness of the five forces
can help a company
understand the structure of its
industry and stake out a
position that is more
profitable and less vulnerable
to attack.
Reprint R0801E
The Five Competitive Forces That Shape
Strategy
page 1
The Idea in Brief The Idea in Practice
COPYRIGHT © 2008 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. You know that to sustain long-term profitability
you must respond strategically to
competition. And you naturally keep tabs
on your
established rivals
. But as you scan
the competitive arena, are you also looking
beyond
your direct competitors? As Porter
explains in this update of his revolutionary
1979 HBR article, four additional competitive
forces can hurt your prospective profits:

Savvy
customers
can force down prices
by playing you and your rivals against
one another.

Powerful
suppliers
may constrain your
profits if they charge higher prices.

Aspiring
entrants
, armed with new capacity
and hungry for market share, can
ratchet up the investment required for
you to stay in the game.

Substitute offerings
can lure customers
away.
Consider commercial aviation: It’s one of
the least profitable industries because all
five forces are strong.
Established rivals
compete intensely on price.
Customers
are
fickle, searching for the best deal regardless
of carrier.
Suppliers
—plane and engine
manufacturers, along with unionized labor
forces—bargain away the lion’s share of airlines’
profits.
New players
enter the industry
in a constant stream. And
substitutes
are readily available—such as train or car
travel.
By analyzing all five competitive forces, you
gain a complete picture of what’s influencing
profitability in your industry. You identify
game-changing trends early, so you can
swiftly exploit them. And you spot ways to
work around constraints on profitability—
or even reshape the forces in your favor.
By understanding how the five competitive forces influence profitability in your industry, you can develop a strategy for enhancing your company’s long-term profits. Porter suggests the following: POSITION YOUR COMPANY WHERE THE

FORCES ARE WEAKEST
Example:
In the heavy-truck industry, many buyers
operate large fleets and are highly motivated
to drive down truck prices. Trucks are
built to regulated standards and offer similar
features, so price competition is stiff;
unions exercise considerable supplier
power; and buyers can use substitutes such
as cargo delivery by rail.
To create and sustain long-term profitability
within this industry, heavy-truck maker Paccar
chose to focus on one customer group
where competitive forces are weakest: individual
drivers who own their trucks and
contract directly with suppliers. These operators
have limited clout as buyers and are
less price sensitive because of their emotional
ties to and economic dependence
on their own trucks.
For these customers, Paccar has developed
such features as luxurious sleeper cabins,
plush leather seats, and sleek exterior styling.
Buyers can select from thousands of
options to put their personal signature on
these built-to-order trucks.
Customers pay Paccar a 10% premium, and
the company has been profitable for 68
straight years and earned a long-run return
on equity above 20%.
EXPLOIT CHANGES IN THE FORCES
Example:
With the advent of the Internet and digital
distribution of music, unauthorized downloading
created an illegal but potent substitute
for...
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